The ongoing debate: “Roth or not Roth”

For many workers (especially those who are self-employed) who do not have access to a 401 (k) plan at their employer, IRAs (Individual Retirement Agreements) are still a viable way to save for retirement. However, unlike the ease of payroll deduction at an employer that offers a retirement plan, those who meet their own payroll must show more discipline in moving funds from their “business checking account” to their own IRA accounts. . (I am very familiar with this challenge).

Most people who have taxable income and are over the age of 18 can establish an IRA. Once someone decides to fund their own retirement account, they should discuss (or do their own research) with an advisor about which type of IRA makes the most sense for them: Traditional IRA or ROTH IRA.

Over the years, I have learned to simplify this “ROTH or No Roth” discussion with my clients and contacts by asking a fairly simple question: “Do you want to pay taxes on the seed and get the crop tax free?” get a seed tax deduction and worry about future crop taxes? “

Let me explain. With a ROTH IRA there is no current tax deduction, which means you would fund the account with after-tax dollars. With a traditional IRA, you enjoy a current tax deduction, so there is an immediate benefit during the year you fund the account. With a ROTH IRA, money grows tax-free, and when you withdraw it, it’s tax-free too. Also, with ROTH IRAs, the IRS does not require you to start withdrawing funds when you turn 70 1/2. Finally, with a ROTH IRA, when you transmit, your heirs receive the funds tax-free.

With a traditional IRA, the tax savings you enjoy today are outweighed by the potential pain of paying taxes on the most money (assuming your investments grew over time) and the IRS will force you to start withdrawing the funds once You hit 70½ – in other words, they want your tax dollars – and they will get it from you or your heirs. However, if you are currently in a high tax bracket and assume that you will be in a low tax bracket when you withdraw the funds, then a traditional IRA may still make sense.

Here’s a no-brainer: If you can establish ROTH for your children (or grandchildren) when they turn 18 (if they are working), this is a great way to start your adult life. Companies like Vanguard and Fidelity have good online platforms that you can use for these types of accounts. They have “Target Date Funds” that can be a good “set it and forget it” way to start investing. For our children, we also provide a dollar-for-dollar match for any contributions they make to their ROTH accounts throughout the year.

Today, since I work primarily with clients who have saved lump sums of money throughout their working lives, I often have the discussion about transferring money from traditional IRAs to ROTH IRAs, which is called “Conversion.” In summary, if an individual has funds other than retirement that they can spend to pay taxes on traditional IRA funds that they do not plan to use for several years, a conversion to a ROTH IRA should be considered. By doing this, the IRA owner will pay the taxes owed today on the amount that he converts and will no longer have to worry (or his heirs) about paying taxes on the increasing amount of money converted. Also, when they turn 70½, the amount they converted will not have to be counted when calculating the amount of withdrawals the IRS requires them to take (Minimum Required Distributions – RMD) and pay taxes.

Some final notes: There are income restrictions when it comes to getting a tax deduction for a traditional IRA. There are also income restrictions that will affect your ability to contribute to a ROTH IRA; These restrictions vary depending on how you file your taxes: single, married, etc. There are also some restrictions on withdrawing funds from a ROTH IRA, depending on whether you are withdrawing earnings or your basis (the amount you contributed) and how old you are. Your tax advisor can advise you on these issues and / or there is a lot of information online that explains these points.